A $400,000 Tax Bill for $5,000 in Income

By October 24, 2007General

Sound like a horrible error? Nope, just the IRS enforcing the law the way it’s written. Have a problem with that? Take it up with Congress. So, that’s exactly what the Coalition for Tax Fairness is doing, petitioning the government to correct badly written law that has hit some people with intolerable, inequitable tax bills.

The flawed law is the Alternative Minimum Tax and the way Incentive Stock Options (ISOs) are treated. Sounds like something that only happens to rich people? Nope. One victim was an office manager. Another was a curriculum developer with a software company.

Many of these folks were working for high tech companies in the 1990s. In lieu of cash compensation, they were given ISO’s. It’s a benefit often used by start-up companies who don’t have a lot of cash on hand, but want to give workers a reason to stick it out through the early years.

Normally, when an employee “exercises” their stock options, they don’t pay tax until they sell the stock and actually realize a gain. But, under the alternative minimum tax, the stock options become taxable the minute they are exercised – instead of when they are sold.

The problem is that in some cases, employees exercised their options only to watch the stock tank – leaving them with worthless shares. But the tax owed was based on the exercised price – not the realized gain.

The stories are heartbreaking. Facing tax bills that amounted to 400 percent of their salary, people sold their homes, liquidated college education funds and retirement plans. Facing penalties and interest on a tax she can never pay one woman related that she’ll be giving the IRS half of her salary every year – until she’s 65 years old – for a tax on income she never received. Ron Speltz, an Iowan who is in D.C. this week to tell his story to Congress, got a $252,893 tax bill for stock options worth $2,000. His tax bill was more than three times his annual salary.

Congressman Chris Van Hollen (D-MD) and Congressman Sam Johnson (R-TX) have introduced legislation, the AMT Credit Fairness and Relief Act – which will, at least, correct the law and provide relief to taxpayers who are still struggling to pay ISO-AMT liabilities. Let’s hope Congress fixes this flawed law sooner rather than later.

Join the discussion One Comment

  • Tim Carlson says:

    This article does a great job of capturing the devastating human impact that the unintended consequences of the AMT as applied to incentive stock options, is having on hardworking, honest American families.

    Certainly it is wrong when the AMT changes the rules for Americans so that millions are hit with additional, unintended tax burdens of thousands of dollars. It is also wrong when the AMT changes the rules for employees so that they are hit with tens of thousands and hundreds of thousands of dollars of tax imposed on income they never received. Neither situation is right; both need to be fixed.

    The strong bi-partisan support in the House and Senate for correcting this law gone horribly awry, continues to build. The AMT Credit Fairness and Relief Act H.R.3861 was added by amendment to the Temporary Tax Relief Act, by unanimous vote of the Ways and Means Committee on November 1. The Temporary Tax Relief Act passed the House on November 9.

    Tens of thousands of families across the Country are now hoping and praying that the Senate will now show its strong support and ensure that the much-needed and long-awaited ISO AMT relief sent over from the House, remains in the final AMT relief legislation that is sent to the President this year.

    And we should all hope with them, because we all as citizens of this Country suffer when injustice is allowed to continue, and we all benefit when justice and fairness are restored.

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